Good morning. Thank you for joining today's presentation. My name is Amber Jackson, and I'm the Head of Investor Relations for NIB. I'm speaking to you today from NIB's Newcastle office, which is on Awabakal land. NIB acknowledges Aboriginal and Torres Strait Islander peoples as the first Australians, and pays respects to elders, past and present, across all the lands on which we operate. We acknowledge the rich and meaningful contribution they make to life and culture in Australia, and we aim to be a partner in improving the quality of life and health of Aboriginal and Torres Strait Islander peoples. The purpose of today's presentation is to provide an overview of the impact of the new accounting standard, AASB 17, which NIB will implement for group reporting from July 1, 2023.
The first reporting period under this standard will be the FY 2024 interim results. I would like to note that we will not be providing any trading update or indications of our FY 2023 result, which is yet to be finalized. Therefore, we will not be answering any questions in relation to the FY 2023 result. Nick Freeman, Group Chief Financial Officer, and Kira Wadsley, Head of Finance for Financial Control and Shared Services, are here today to take you through the presentation, and will respond to any questions at the end. I will now hand over to Nick Freeman. Nick, please go ahead.
Thanks very much, Amber, welcome to everyone. I think we've got 30 or 40 people on the line, so thank you very much for joining us. We just thought we'd, we'd schedule this meeting so to separate really what are accounting impacts from the, the full year result, which we'll report later in August. It just looked to us like there was quite a busy day in, in August when we're reporting. Just an opportunity to, to focus on the result in, in August, and to, let you know about what impacts we're seeing in regard to AASB seventeen. We've, we've lodged the, the presentation on the ASX website and also ours, and so, I expect that a lot of you will have already seen this.
I'll, I'll go through relatively quickly and, and then we can go to questions. Key messages: I think that we all know that a new insurance accounting standard is commencing from next year, or this year, I should say, now that we're, we're in the financial year. Amber's already said that we'll be implementing it on 1 July for the, for the first half of, of next year. Some of the key messages, no impact on cash flow and no material impact to capital. That's a really important aspect to call out.
The main impacts we do want to call out is just around the timing for recognition of COVID-related adjustments. By those, we're really talking about the approvals for the price increase deferrals that the industry has done, and also we have done, and any DCL that may be residual at 30 June. Again, going through those, so in terms of the DCL, any residual DCL at 30 June, as I think most of you are already aware, will, will shift to equity. It won't remain in the, in the provisions area or the, or the liabilities area in the balance sheet. Won't be free to, to offset, if I could put any catch-up in terms of a PNL impact.
However, because it shifts to equity, from a capital perspective, there will be an additional capital that will then offset any losses that occur as a result of the increase in claims if a catch-up should occur. In terms of the price increase deferral, this is probably the main one. We've got a slide that will take you through it, essentially, reported revenue will be AUD 26.6 million lower in FY 2024. That's not an impact that's actually new. That's actually just a difference in the timing of recognition of when the revenue has occurred. We've announced our price increase deferral until 1 October. That, under AASB 1023, will have an accrual for it at 30 June.
That 30 June accrual will not be retained on 1 July under AASB 17, so we'll revert to the new accounting standard there. In that regard, we'll have to recognize the amount of revenue or reduction in revenue as it, as it's incurred across July, August, September. Important, again, to understand that any impact is offset by an increase in the opening equity. Again, that accrual will go down into equity and will increase equity. Just that P&L versus equity, equity mismatch occurring. If you looked at the total cumulative UOP across FY 2024, there's no material difference.
The reason we say material is there is actually no difference in regard to the price increase deferral, but there's some, some other smaller elements that will have a small effect, but not, not material. Again, then going forward into FY 2025, once the COVID-related adjustments are no longer there, we're not expecting any material differences between UOP and NPAT between the two accounting standards. The final thing just to, just to highlight is that we're not intending to treat the DAC differently, so we're going to be retaining a DAC. That will occur under AASB 17. You have the ability to continue it. You could also not, not continue it as well, and then, then any write-off would have occurred to equity.
We've, we've elected to retain it, given, given the position in our business that we have in regard to third-party distribution, and also in regard to our focus on lifetime value of, of customers. We think that there, that there's a, there's a better reflection in our accounts between, between having a DAC and, and how we look at customer acquisition. I might then continue on. Again, a quick summary. A lot of this is, is repetitive, so I'll go through this relatively quickly. We've talked about the price increase deferral. We've told you before that the, that the impact of the price increase deferral was AUD 35.5 million. We would normally have recognized that all in, FY 2023, under 1023, which we, which we will be in, in our accounts.
So that will manifest itself in terms of, of 3 months, that will have a, a reduction in revenue in the last quarter of, of the FY 2023 year, then would accrue for the, for the coming months apart from that. We've therefore now got to look at it over the, the, the new concept of the contract boundary, which will mean that we've got to spread that recognition between FY 2023 and FY 2024. We are using the PAA approach, and again, a simplified PAA for health life and living benefits in, in New Zealand. I've just talked about we're, we're intending to retain the, the DAC, and so there's no change there.
Again, the DCL, they're not recognized from July 1, so anything at June 30 will transition down to equity. We're not expecting a material difference between the risk adjustment concept under AASB 17 and the risk margin under 1023. In the onerous contracts, we're not anticipating a recognition of any onerous contracts on implementation, but as you'd know, there's a continuation of the need to review facts and circumstances on an ongoing basis. Now, if I could just jump to the next slide, we'll take you through the price increase deferral. We've allowed that. We expect that you'll sort of have a look at this in your own time. We'll go through and we'll. W hat we've done is we've set out the...
how it's accounted for under 1023 and 10, and AASB 17. I might just go to the first part, the first point that we're looking to make. If you could, Amber. The first point is that there's no change to cash flow between the two. You can see that the cash flow impact in FY 23 is the same under 1023 and 17, and it's also the same in FY 24. Going to the next stage, Amber. Again, there's the same impact in total across the two years on UOP and NPAT under the two. There's the AUD 35.5 million before tax and the AUD 24.8 million after tax. Again, no impact between the two. The final impact on the balance sheet will be the same.
Again, when we look at what the closing equity on the impact on the balance sheet, it will be a negative AUD 24.8 because we are reducing our revenue by after-tax AUD 24.88 million. The final impact on the balance sheet, also the same. Then the last one. Really, this comes to the nub of it, is the difference in recognition, and what you can see in the greener, the darker green box, is that under 1023, we recognize AUD 35.5 million all in FY 2023 and nothing in FY 2024. Under AASB 17, we would have recognized AUD 8.9 million in FY 2023, and then we'll recognize the AUD 26.6 million in FY 2024. Again, just coming back, no cash flow.
The NPAT and UOP different, UOP is, is the same, but there's that difference in the, in the recognition. What I might do now is I might just. I think we've already covered this, so I'll just quickly sort of go through. I think we've talked about that, so I will leave that one for you to read, at, at your own leisure. We've just, it really just says what we've already covered, in the numbers. I might now hand across to Kira to talk about some of the accounting positions and accounting impacts.
Thanks, Nick. As Nick outlined, we are going to be using the premium allocation approach, the simplified method, for both Australia and New Zealand. We have determined that the Australian health insurance and the NIB travel contracts are eligible for the PAA. Under the PAA, a contract boundary must not extend beyond 12 months. As a result, we have determined the contract boundary for all our AHI members to be defined as the pricing year, beginning April 1 and ending on March 31. For New Zealand, the insurance contracts for both NZ Health and Life and Living Benefits are eligible for the PAA methodology. Given the complexity of the Life and Living Benefits business, the treatment of the reinsurance arrangements is still being finalized, with the intention to also apply the simplified PAA methodology.
There is not expected to be a material difference for the NIB Group between a PAA method and GMM. New Zealand's contract boundary is a rolling 12-month contract boundary, beginning from the contract start date. We can move to the next slide, thanks. Nick also outlined that we are not proposing to change the treatment of our acquisition costs. Under AASB17, when using the PAA method, you can choose to either expense upfront acquisition costs if your coverage period is no more than 1 year.
However, we have chosen to continue to defer recognition of upfront commissions to the balance sheet and amortize them over the life of the policy. For our different businesses, the expected amortization over the life of the policy will remain 5 years for Australian residents health insurance, 18 months for our international students health insurance, and 15 years for NZ Health.
Our decision is based on our focus on the lifetime value of the policy and our use of brokers and white label partnerships. There is no impact to capital by continuing to defer acquisition costs, as they are 100% deducted in the PCA calculations. We'll now move to questions and answers. Oh, apologies. Nick, I'll send it back to you to do a summary.
No problem. Thanks, thanks, Kira. In summary, really what we're trying to say is that in total, there hasn't been an impact on or a material impact on underlying operating profit against those years. The only impacts have been in regard to those COVID-related items of the DCL and the price deferral accounting. We've talked to you about how they'll adjust, and especially on the price deferral, around how between the FY 2023 and FY 2024 year, they are the same impacts. From FY 2025, no material difference between UOP and NPAT between the two accounting standards. No impact on cash flow. Closing equity position will be the same under both accounting standards. No material change to the PCA multiple or to our gearing ratio and so forth.
Really, the, the message here is just to let you know of those, those one-off transition impacts, that are, that are going to come through into FY 2024. To highlight, again, no material differences between, between the standards when, when looked over across multiple years, and also that the, the cash position remains, remains the same. With that, I might thank you everyone very much, and go to questions and answers.
Thank you. If you have a question at this time, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. One moment while we compile the Q&A roster. Our first question comes from the line of Karen Cho. Your line is open. Please go ahead.
Morning, guys. Hi, Nick. Just 1 question on the DAC policy. I f we are using the PAA method and you've got a 1-year contract boundary, I'm just interested in sort of, the optionality you've got of, or choosing the deferral period, and sort of, how you think different insurers across the market are, are approaching that decision.
I'll, throw it to Kira in terms of the, the technicals. In, in terms of what other people may be doing across the market, I think we'll leave them to advise of their own situations. From our perspective, given our distribution channels, and given our focus on lifetime value, we thought that it made the most sense for us to retain the position. Other insurers may have a different position as well, and the accounting standard allows for both. Kira, you, you might like to, to expand in terms of the, the optionality within, within the standard.
Yeah. Paragraph 28 of the standard outlines that a asset for insurance acquisition cash flows can be recognized. As we've outlined in our presentation, when you are able to use the PAA method, and you do have a coverage period of no more than 1 year, under paragraph 59 A, you do have the option of either expensing those commissions up front or choosing to capitalize and amortize those. We have chosen to continue to capitalize and amortize for the reasons that Nick has outlined.
Okay, that's great. Just to be clear then on, secondly, on the accounting, obviously, your FY 2023 is under, still under 1023. We'll see the premium deferral booked sort of as a bigger number, and then in 2024, sort of, you, you're swapping, so you'll kind of have the negative impact again.
Yeah, look, that's.
Yeah.
That's the way, but offset by an increase in equity. One of the reasons we decided to have this because we know the positions, we're going to have to disclose something in our accounts. What we have to disclose is our opening balance sheet as at FY 2022. It's, Look, when I looked at it, it sort of was a little confusing. That, that's the way that I'm looking at it, Kieran, is, if you think that you had an accrual there at 30 June, it essentially becomes equity at on 1st of July.
Okay. if the DCL.
Yeah, have I just, have I butchered that?
No.
So.
No, completely right, Nick.
Okay.
We will
That's, that's good, though.
Yeah. We'll be disclosing our-
Yeah
Opening balance sheet. We've taken you through the impact of what it'll have, in FY 2023 and 2024. We also had a, a price deferral the year before. You're gonna see that impact flowing through the opening balance sheet position.
Okay. Thank you. Just finally, the DCL, that, that doesn't I mean, obviously moves into equity, as, as you've said. Then, how does that actually sort of change on a go-forward basis, based on claims experience, by from.
I mean.
Yeah.
To the extent that there's, there's a residual there, again, it's the same kind of treatment, is that, it will move down to equity on the 1st of July. And any loss in profitability that may occur if catch-up occurs. It will manifest itself in a reduction in, in profit if the catch-up occurs, but it won't manifest itself in a reduction in, in equity against where it would've been under 1023, because you're already starting with a higher equity balance.
Okay. And is the intention to somehow release some of that equity back to policyholders on a go-forward basis, if, if not required?
That's, that's beyond the scope. Let's, let's talk about that in later in August.
All right. Thank you.
Thank you, and one moment for our next question. Our next question comes from the line of Siddharth Parameswaran with J.P. Morgan. Your line is open. Please go ahead.
Hi there. Just a few questions, if I can. B- p- possibly a similar question to what Kieran was asking. I just want to understand, just given that there's a promise not to prof-profit from C-COVID, if I just want to be clear on exactly what will happen if claims remain lower than your assumptions on a go-forward basis, and you give that back once again through a premium deferral, but you also start giving back the DCLs, because, you know, they're set aside in case there's a bounce back in claims. You know, at some stage, if there isn't, I just want to understand how that will hit the P&L. Will, will, will there then be a drag on the P&L, if, if you are to release both those things together?
Well, I think if you take the two positions, the not profiting from COVID piece, is that we're aware of our commitments, and our intent is to uphold those commitments. That's as much as I'll say on not profiting from COVID, because feel that sort of meanders its way into the FY 2023 result. In terms of any residual DCL, is that again, the way that I'm looking at it is that any residual DCL at 30 June will become equity on the 1st of July. Between 30, 30th of June and the 1st of July, your equity balance will increase.
If there's a claims catch-up, which the DCL would normally have, have offset in the P&L, it's now no longer available to offset in, in the P&L, so you'll have a lower profitability. It's not like an asset revaluation reserve, where you could release it back out into, into P&L and offset the two, and the P&L would be kept whole. You're, you're essentially got a, a reduction in, in, in profit being caused by any catch-up, if that occurs, being offset by a higher equity balance on the first of July.
I'm not sure I understand. I mean, clarify my question, the DCL is there in case there's a bounce back in claims. That's the purpose of it, and you have made a promise not to profit from COVID, and that's why that DCL is there. I understand that it's gonna change from a liability to now, I mean, it will become a line in owner's equity on an after-tax basis, but that was.
Mm-hmm.
The purpose of what it was there for. If you are... I presume it was there with your logic of not profiting from COVID, I just want to understand if it is released. I mean, it's just a question on signature, profit signature. Was my question... Was my interpretation correct? I'm not sure I understand whether you're saying it is or it isn't.
If a catch-up occurs next year.
No, no, if there's no catch-up, but you, but you're, you're, you're living up to your promise of not profiting from COVID, so you give the DCL back.
Yeah. again,
I mean.
again, Sid, I can't comment on the situation of not profiting from COVID, because I feel that that is going to wander into FY 23. Other than we have a definition...
It's a hypothetical question. It's a hypothetical question of what, how it would work, that's all. I'm, not asking, whether, whether you will give it back or, or not. I'm just asking if you gave it back. It's a question of accounting.
Yeah.
It's not a question of what you're gonna do.
I guess the way that I'm working is that the way that we will account and the way that we will report not profiting from COVID will be consistent, and that we will not be profiting from COVID, and that is our, our intent.
Okay.
I'm, but I'm not, I'm not gonna be able to... I'm not gonna be able to talk to you about that position because, again, I just feel that even though it's sort of in hypothetical, it sort of meanders a little bit too far into, into the territory of the FY 23 result.
Okay, I'll leave that one aside. If I can ask a question just on capital as well, just, we, I think we were given a statement on capital, I think, on what it would look like under the new capital standards. I just want to be clear whether the, the tax effect of DCL was counted in owners' equity in that statement that you gave us on, on the capital position. I think it was, like, 200 times the PCA, I think that you'd given us at the last result. Did that include the DCL being in, being in owners' equity, or?
No, that would include the, the tax-affected amount being in. The December we gave you a, a calculation at December, and that would've had the, the calculation of, of the PCA being in as a liability and not in, not in equity.
Right. Okay. so the PCA will increase because. PCA coverage will increase going forward. Is that right?
Potentially. Again, potentially, if it moves down to equity. Then, again, because we're closing equity, should be the same, because you're only holding a DCL if you think there's more catch-up. In theory, it should then equalize because the equity will reduce.
Oh, okay. Okay, so as in, there will be an allowance for a catch-up in the capital, in the capital allowance. Is that right?
Well, I'm not saying there will be an allowance. It will just naturally occur if it happens, because there will be a reduction in profitability that will reduce capital. Would have less of an increase in capital, if I could put it that way.
Okay. I mean, just my question is just on the PCA multiple, given that it'll move to owners' equity, will it, on day one of transition, will it, will it count. Will the capital position be higher?
It should. On the first of July, in theory, it would be a higher number.
Yeah. Okay, okay.
On any, if, again, stressing the, we're talking about theoretical balances.
Yeah, sure. Okay. No, thank you for that. Okay. Just a final question for me. Just the onerous contracts. I just want to get a perspective on how the boundaries will be, will be assessed. W ill it be done at a state level? Is it done? I mean, what are the cohorts that you're looking at?
It will be done on a, on a product level, and we're, we're currently looking at the, the products that we're considering in terms of the groupings. Again, we'll, we'll disclose those at the end of August. In that respect, I don't think we'll be in a position to disclose those now, but within those groupings, there are no onerous contracts.
Yeah. Okay. Okay, thanks, thanks very much. Thanks.
Thanks, Ian.
Thank you. Again, if you have a question at this time, please press star 1, 1 on your telephone. It looks like we have another question from Julianna Garrard with Goldman Sachs. Your line is open. Please go ahead.
Morning, guys. Just one initial question. In terms of just the rationale for how you came about with this, with the contract boundaries definition, just in terms of the difference between Australia and New Zealand. I just want to understand the context behind, behind how you set that.
Kira, do you want to go with that one?
Yeah. In New Zealand, we have rolling 12-month contracts. A ny contract is issued with an expiry date, similar to what it would be like for car insurance. For health insurance in Australia, we don't have that same concept. You know, the contracts are open-ended. In order to be able to use the simplified PAA methodology, we wanted to see if we could choose a contract boundary that is less than 12 months. When you're looking at when you can have the ability to reprice for risk, you have an annual pricing year. We've determined that that contract boundary for our Australian residents is 1 April to 31 March.
Okay, fair enough. Just one, just the other question: In terms of the expectation that there'll be no material differences from, from FY 25 onwards, that's, that's an assumption that there'll be no further pricing deferrals. Is that, is that a fair, is that a fair conclusion?
Yes. Yes, that would be a reasonable, a reasonable way of looking at it.
Okay, great. Okay, thanks so much for that.
Thank you. I'm showing no further questions, and I'd like to hand the conference back over to Nick Freeman for any further remarks.
Well, I'd just like to thank everyone for, for their attendance and for their interest. We look forward to seeing you all later in August, when we present our full year results. Thank you very much.